Planned changes in income taxes

On 12 July 2017, the government published their draft of: significant amendments to the Act on Corporate Income Tax, the (“CIT Act”), the Act on Personal Income Tax, the (“PIT Act”), and the Act on Flat-Rate Income Tax on Revenue earned by Natural Persons.

The purpose of the proposed amendments is, among other things, the partial implementation of the provisions of EU Council Directive 2-16/1164 of 12 July 2016, which lays down provisions which prevent taxation avoidance practices (these amendments relate to limiting the costs of financing, and amending the regulations on controlled foreign corporations). The remaining planned amendments result from the continuation of the Ministry of Finance’s activities aimed at the further limiting of any activities related to aggressive tax planning. According to the assumptions of the draft’s promoters, these planned amendments will result in an estimated increase of budgetary revenues derived from income tax in the amount of approximately PLN 28 bln between the years 2018 and 2027.

According to the draft, these amendments are planned to become effective as from 1 January 2018. Below we present, in brief, the most important proposals included in these draft amendments:

Separating two sources of revenue under the CIT

The government plans to separate two sources of revenue generated by CIT taxpayers: from capital gains (e.g. dividends, revenues from redeeming shares, the disposal of stocks and shares, the value of post-liquidation properties, and the revenue earned on account of taking up shares in exchange for contribution), and from economic activity and special sectors of agricultural production. The major consequence of separating the sources of revenue under the CIT will be the impossibility to settle a loss incurred from one source with income earned from an another source of income. For instance, the loss from selling one’s own debt claims resulting from economic activity can no longer be settled with income earned from the same activity being carried out.

According to the draft amendment, expenses for intangible services, including, but not limited to accounting, marketing, advertising, or legal services, as well as fees for using intellectual and industrial property rights, can be included in revenue earning costs up to an amount not exceeding 5% of the company’s EBITDA. This limit is not to apply to costs which do not exceed PLN 1,200,000 per year. However, as can be determined from the latest statements from representatives from the Ministry of Finance, this limit will not apply to purchases of professional services from non-affiliated entities (according to the original and still binding version of the draft amendment, this limit refers to acquiring services from any entities, including non-affiliated ones).

Changes in the provisions on thin capitalisation

The proposed draft amendment is to completely remove the provisions on thin capitalisation from the regulations which are applicable to the costs of financing provided by affiliated entities. In their stead, there is planned the introduction of a general limit related to the possibility of including in the revenue earning costs those financing expenses incurred by finance operations irrespective of the entity providing the financing. The costs of the financing (covering not only any interest, but also any commissions or similar expenses) will be included in the revenue earning costs only up to an amount no greater than 30% of the company’s EBITDA. The limitation will not, however, apply to financial institutions and those taxpayers whose costs of financing do not exceed, within a fiscal year, the amount of PLN 120,000. As a result of recurring criticisms to this solution after the first draft amendments were published, the Ministry of Finance is considering the possibly option of increasing the proposed limit of deducting the revenue earning costs by expenses for financing.

According to the transitional provisions, the presently binding regulations (e.g. the provisions on thin capitalisation) are to apply until the end of 2018 with respect to the funding which will be factually granted to a taxpayer until the end of 2017.

Tax on commercial real properties

The draft amendment stipulates the imposing of tax on revenue earned by owners of commercial real properties; which is actually a tax on wealth. Commercial buildings (retail and service buildings, as well as office buildings) where their initial value exceeds PLN 10,000,000 are to be subject to taxation. The monthly tax rate is to amount to 0.042% of the initial value of the building (0,5% annually), irrespective of whether the building generates any income or not. As a rule, this tax is to be deducted from standard income tax. As a consequence, with respect to taxpayers incurring losses in their income tax, or entities which are subject to object-based exemption from the CIT (such as, for example, Polish investment funds or analogical funds based in other EU member states), this new burden will constitute a real tribute to be paid by these entities.

Economic justification clause related to the contribution of an enterprise, or its organised part

Similarly, there is a plan to introduce to transactions of restructuration, or the exchange of shares, a clause of economic justification to a non-cash contribution of which the subject will be an enterprise or its organised part. Should there be no justified economic reasons for making the contribution, the fiscal neutrality of the transaction can be questioned.

Changes in recognising costs when selling the stocks or shares of a divided company

There will be a modification to the principles for recognising revenue earning costs when selling the shares of a company which is being divided, or after its division by separating it. The proportion will be determined based on the issue value of the shares / stocks of the company being separated (i.e. the price for which the shares / stocks have been subscribed for, not lower than their market value), and not on the basis of their nominal value, as has been the method utilised so far.

Changes in the principles of taxation of the CFC

There are also changes planned in the definition of a controlled foreign corporation (CFC) by replacing the criterion of the nominal rate of foreign tax with the factual tax paid by a foreign corporation, and reducing the passive revenue threshold from 50% to 33% which is the condition for applying the CFC provisions. In addition, the definition of a subsidiary (the required share of a taxpayer’s “control” is to increase from 25% to 50%) is to be changed. The CFC’s tax assessment basis is to be reduced by the dividend and the income gained from the disposal of shares which is effectively subject to taxation in Poland.

Determination of revenues and costs related to disposing a debt claim

According to the draft amendment, the Act on CIT and the Act on PIT are to directly stipulate that revenue from the non-gratuitous disposal of a debt claim will be its price. However, should this debt claim previously have been included in revenue earning costs as being irrecoverable or redeemed, the revenue reflected in the sale price will be increased by the costs previously deducted. Analogous rules will apply if this debt claim is contributed to the company. In addition, the Act is to directly stipulate what is the revenue earning cost in the case of a non-gratuitous disposal of debt claims. The determination of these costs will depend on the type of the source of the debt claim (acquisition of a debt claim, a debt claim resulting from a loan being granted, or one’s own debt claim included in due revenues).

Estimating the market value of services

The draft also stipulates extending the application of Article 14 of the CIT Act to the provision of services. This means that tax authorities will be entitled to, not only assess the market value of any items or property rights being transferred (resulting from the currently binding provisions of law), but they will also acquire the right to assess the market value of those services being rendered by non-affiliated entities.

Reclassification of the sources of revenues earned from implementing financial instruments issued within the framework of incentive programmes

There is a plan to reclassify the source of revenues with respect to the profits generated from implementing derivative financial instruments, or from employee’s shares which have been issued to employees within the framework of incentive programmes. The plan is that any revenue earned by an employee will be subject to taxation under general principles (18% and 32% instead of 19%). The proposed solution is consistent with the tax authorities’ negative approach to the taxation of income earned by employees from incentive programmes with a flat-rate income tax on natural persons.

The draft amendment was sent out for consultation to numerous entities interested in the planned regulation (for example: various chambers of commerce, employer associations, and entrepreneur organisations, etc.). For this reason, at this moment, it is uncertain as to whether all these proposed amendments will come into force, and if so, with what wording. We cannot exclude the possibility that certain provisions will be eased as per the recent statements from representatives from the Ministry of Finance have indicated (e.g. with respect to limiting the costs of intangible services, or the costs of financing). Unquestionably, considering the fact that these amendments are planned to become effective as from 1 January 2018, it is necessary to carefully observe the progress of all works on this draft to ensure that enterprises will be prepared for the planned changes.